George Osborne has vowed to stick to his economic strategy despite Britain being stripped of its prized AAA credit rating.
The Chancellor struck a defiant note after Moody's downgraded the country to AA1 - warning that sluggish growth would continue for years.
He played down fears that the Government's borrowing costs could rise sharply as a result, saying there was still confidence in the UK's ability to service its debts.
But shadow chancellor Ed Balls said it was a "humiliating blow" after Mr Osborne spent years stressing the importance of keeping the gold-standard rating.
Explaining its decision, Moody's pointed to "subdued" growth prospects and a "high and rising debt burden" weighing on the economy. It said it now expects the "period of sluggish growth" to "extend into the second half of the decade".
"The main driver underpinning Moody's decision to downgrade the UK's Government bond rating to AA1 is the increasing clarity that, despite considerable structural economic strengths, the UK's economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public and private sector deleveraging process," the agency said.
Mr Balls said the decision was a "very, very bad moment" for Mr Osborne - who is preparing to deliver a crucial Budget next month.
He insisted the Government should slow down the pace of deficit reduction and borrow more in the short term to find a stimulus for the economy.
However, in an interview at 11 Downing Street, Mr Osborne said: "I think we've got a very clear message, a loud and clear message that Britain cannot let up in dealing with its debts, dealing with its problems, cannot let up in making sure that Britain can pay its way in the world.
"What is the message from the ratings agency? Britain's got a debt problem. I agree with that. I've been telling the country for years that we've got a debt problem, we've got to deal with it. What do they also say? That if we abandon our commitment to deal with that debt problem, then our situation would get very much worse and I'm absolutely clear that we must not do that."
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